Delay to U.S. China investment ban has U.S. investors jittery

A U.S. Treasury move to delay a ban on investments in companies linked to the Chinese military has left U.S. investors in limbo and unable to tap opportunities non-U.S. investors get to enjoy.

U.S.-China tensions ratcheted up in the final weeks of Trump’s presidency with his executive order banning investments in companies his administration said were linked to Chinese military activities.

A string of amendments and explanations followed the November order, buffeting Chinese stocks and bonds in the crossfire as investors struggled to understand which securities could be affected.

Stock listings were quickly removed from U.S. exchanges and global indexes, while bond investors wrestled to untangle securities issued by slightly different, shortened, or similar names.

Biden administration recently announced that the investments in companies “whose name closely matches, but does not exactly match, the name of a communist Chinese military company” would be allowed until May 27, extending a deadline set for Jan. 28.

That provided breathing space but does not fix the problem.

Restrictions on U.S.-based investors and U.S. citizens could affect nearly $60 billion worth of bonds, as China’s debt market is one of the world’s largest.

Chinese credit spreads are attractive compared to U.S. credit spreads and investors benefit from diversification when they allocate across more markets and geographies.

Many issues, such as those by China National Chemical Corporation (ChemChina) or China National Offshore Oil Corp (CNOOC), offer a pickup on the ultra-low yields dominating developed world fixed income markets where central banks are battling the COVID-19 pandemic with massive asset-purchase programs.

While Biden’s team has yet to spell out its approach, few expect sweeping changes. Some U.S.-based investors hope the new administration will implement curbs in a way that affects the companies but not investors.

“If you put sanctions on the ability of investors to hold debt, you’re not hurting the company that issued the debt -you’re hurting the investors that bought it,” said Shamaila Khan, head of emerging market debt strategies at AllianceBernstein.

“When you sanction a company for future issuance of debt, then you hurt the company more than the investors of the debt. So, there are nuances,” she added.

And demand seems unabated for China, which accounts for around half of Asia’s $1.4 trillion corporate credit dollar market – roughly the same size as the U.S. high-yield markets.

AVIC International Holding Corp, a subsidiary of Aviation Industry Corporation of China, recently received more than $700 million of orders for a $200 million bond sale that priced close to its existing curve.

Meanwhile, the Dow Jones futures and S&P 500 futures were squarely higher, while Nasdaq 100 futures were sharply higher late Monday after “productive” stimulus talks between Biden and a group of Republican senators.

GME stock plunged 30% amid the ongoing short squeeze. Tesla stock surged on a price-target hike Monday, while Dow Jones leader Apple is again becoming investor’s prized choice.